By Ankur Banerjee and Stefano Ribaudo
(Reuters) – The dollar hovered near a seven-month low on Tuesday amid bets the U.S. central bank will start cutting interest rates next month, with traders bracing for comments from Federal Reserve Chairman Jerome Powell on Friday.
The dollar’s weakness has lifted the euro to its highest level this year, while sterling held near a one-month high. The MSCI emerging markets currency index also hit an all-time high.
The Swedish krona fell after the central bank cut interest rates by 25 basis points and forecast two or three more cuts in 2024. The krona was last down 0.33% at 10.27 against the US dollar.
Attention this week will focus on Powell’s speech at the annual gathering of central bankers in Jackson Hole, but the minutes of the Federal Reserve’s latest meeting – due out on Wednesday – will also be in the spotlight.
Some analysts say the next few weeks are likely to be crucial in determining whether the Fed will cut rates by 50-75 basis points this year or by 150 basis points or more. They add that Jackson Hole is the Fed’s first chance to respond to the possibility of a 50-basis-point rate cut at one of its three remaining meetings this year.
Although the deteriorating labor market led to expectations of a deeper rate cut in September, data since then has been mixed with upbeat retail sales, suggesting that consumer demand remains resilient.
However, the US economy remains “vulnerable to recession in the event of a financial shock,” said Thierry Wezeman, global FX and interest rates strategist at Macquarie.
But this financial shock may not come soon. In that case, we may remain at below-trend growth and look like we are at peak growth until the Fed eases monetary policy enough.
The CME FedWatch tool showed markets expecting a 50 basis point rate cut in September at 24.5%, down from 50% a week ago, with a 75.5% chance of a 25 basis point cut. Traders are expecting 93 basis points of rate cuts this year.
A narrow majority of economists polled by Reuters expect the Fed to cut rates by 25 basis points at each of the three remaining meetings.
The euro was last at $1.1077 on Tuesday after touching $1.1087, its highest since Dec. 28, in early trade. The single currency has risen 2.4 percent this month and is on track for its strongest monthly performance since November.
The U.S. dollar index, which measures the greenback against six major currencies, was at 101.86 after touching its lowest since Jan. 2 at 101.76 earlier on Tuesday. The index has fallen more than 2 percent in August and is on track to fall for a second straight month.
Expectations of a US interest rate cut also pushed the Australian and New Zealand dollars to their highest levels in a month.
Oida is waiting
The Japanese yen eased slightly to 146.98 yen per dollar, still close to a nearly two-week high touched in the previous session but still off a seven-month high of 141.675 touched in early August.
Tokyo’s bouts of intervention early last month and surprise interest rate hikes have pushed the yen away from a 38-year low of 161.96 it was stuck at in early July, unnerving investors who have sharply reduced their bets against the yen.
Investors will be focusing on Bank of Japan Governor Kazuo Ueda when he appears before parliament on Friday. Ueda is expected to discuss the BOJ’s decision last month to raise interest rates and attention will be focused on whether he will stick to his recent hawkish tone.
The pace of the yen’s appreciation is likely to be more gradual as data shows most speculative short positions have been liquidated, said Claudio Wewell, a strategist at J. Safra Sarasin.
The latest weekly data through Aug. 13 showed that leveraged funds — typically hedge funds and various types of money managers — reversed their long-short position in the yen and are now net long for the first time since March 2021.
Barclays said monthly data showed retail investors halved their net short positions in USD/JPY in July as the yen strengthened amid renewed expectations of a rate hike by the Bank of Japan.
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